MORGAN STANLEY: It's too late for the Fed to save the stock market - but these 2 strategies can help investors stay afloat
- Morgan Stanley chief investment officer Mike Wilson says two cautious strategies can help investors in a stock market that's been rattled by trade tensions and fears about the health of the economy.
- Wilson says future interest rate cuts won't help the market in the near future because there are too many signs the economy is losing strength. Those range from weaker consumer confidence to slumping corporate profits, with the trade war making it worse.
- Stocks got a boost earlier this summer because investors felt that interest rate cuts would speed up US growth.
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It seems like only yesterday the Federal Reserve was bailing out the stock market by promising cuts in interest rates.
Mike Wilson, Morgan Stanley's chief investment officer and chief US equity strategist, says it's too late for that now. While investors want at least one more rate cut this year to shore up the economy, Wilson says further monetary easing measures aren't enough to shore up a market that's being affected by rising economic fears.
"Once the Fed starts cutting after a pause following a long rate hike campaign, it's not good for stocks," he says. "Historically, a regime of falling yields and falling inflation has been a notably weak environment for equities."
That's because rate cuts usually mean a weakening economy, and concerns about the economy, along with worsening corporate profits and a possible recession, inevitably cancel out the benefits of lower rates.
Wilson says consumers aren't feeling as good as they were a year ago, and income growth and job gains have both slowed, while companies are trying to cut costs by reducing workers' hours. All of that is taking place during an intensifying trade war as well.
With all of that in mind, he says these two approaches can help investors succeed in an unsettled market.
Long defensive, short secular growth
Wilson is telling investors that it's probably too late to simply play defense by buying stocks like bond proxies, which are now expensive, or sell cyclicals, which have suffered some of the worst losses in the recent market turmoil.
But he argues that they should take a long position on defensively-oriented stocks and short positions on stocks that have tighter links to the economic cycle.
"At the end of a growth scare when recession fears emerge, secular growth stocks typically underperform defensives," he writes. "We continue to like this pair for another 10% move."
Wilson backs up that point with this chart, which shows that in a fading growth or recession scare environment, more defensive companies like consumer staples, health care and utilities stack up better against stocks in areas including software, internet, payments and branded consumer apparel.
Long S&P 500, short Nasdaq 100
While it offers lower risk and fewer Wilson describes this trade as more liquid way to approach the same growth scare concerns. He notes that the benchmark S&P 500 index and the Nasdaq 100 have both rallied over the past few years, but the latter index is starting to lag. He's betting that the trend will continue.
"A breakdown now would fit nicely with our view that the areas of greatest relative strength always break down at the end of a correction/growth scare like the one we are experiencing now," he writes.
Wilson justifies that view of the Nasdaq 100 by noting its high concentration of secular growth stocks, and while the S&P 500 also has plenty of those, by comparison it has a more substantial concentration of defensively-oriented companies including consumer staples and REITs.